One of the great themes of the modern age is concern for the environment. Sixteen year old Greta Thunberg has captured the world’s imagination with her stance against global catastrophe. In doing so she has accused business of being complacent - but is she right?
A recent article by Garry White for Charles Stanley looked into this question. It began;
“Chief executives of the world’s major companies are more concerned with PR stunts that make their companies appear “green” while not really doing anything to benefit the environment. That’s according to teenage activist Greta Thunberg, who pointed the finger at bosses of the world’s major businesses at the COP25 climate summit in Madrid last week. But, on this issue, Ms Thunberg is dead wrong. Many company boards are taking this issue very seriously indeed; their bonus payments could depend on it.
“I still believe the biggest danger is not inaction, the real danger is when politicians and CEOs are making it look like real action is happening when in fact almost nothing is being done apart from clever accounting and creative PR,” Ms Thunberg said. But real changes are being made and they are being driven by investors – and companies that fail to take this issue seriously are likely to see their share prices punished. With many chief executives’ remuneration packages tied into share-price performance, this is an issue they will not ignore. “
As professional financial planners and investors, we’ve witnessed many themes over the years that drive investment markets, from technology to Internet stocks to food shortages. One of the themes that has come to the fore in recent years is ESG investing - short for environmental, social and (corporate) governance.
Garry’s article explains; “Ethical investing used to be all about excluding investments in businesses that were harmful or went against certain principles. For example, in the 18th century Quakers prohibited investments in anything related to the slave trade, and Methodists refrained from investing in industries that “harm one’s neighbour”. However, ESG investing is not about exclusion alone. It moves away from a pure negative-screening approach, and instead focuses on companies that take a positive approach to managing these issues.
This is something the investment industry has been working toward for many years. The term ESG was first heard at the Who Cares Wins conference held in 2005. The conference brought together institutional investors, asset managers, research analysts, global consultants, government bodies and regulators to examine how investors and asset managers could have a positive impact on the world. Slowly this has been growing in importance since then.”
At Chesterton House we offer ‘ethical’ portfolio options to our clients, but traditionally we have expected these to slightly underperform our primary portfolios, firstly because of the more restricted nature of the investments they contain, but also because of the higher costs of running an ethical investment fund, with fund managers typically charging more for the additional screening and analysis work required.
We’ve noticed, though, that without having to apply a strict ethical screen to our selected funds, they are tending to move towards environmentally friendly businesses in any case, a trend which is the subject of Garry White’s article. He points out;
“....this week US oil behemoth Chevron said it was writing down as much as $11bn worth of assets after it changed its long-term assumptions about energy prices. This is partly down to a glut of gas in the US, but is also a result of policy decisions by governments to encourage the switch to alternative energy sources throughout the world.
The shipping industry also faces new regulations from 1 January, when new pollution rules take effect. To reduce emissions of toxic sulphur, shipowners will have to either switch to a low-sulphur fuel or install exhaust gas cleaning systems. It has been estimated that the industry will have to invest around $10bn to meet these new regulations.”
These developments have a consequence for share prices, and therefore on the willingness of individuals and institutions to commit money to these businesses.
Our view is that, in the long run, businesses prosper by delivering what their customers want. There has been a seismic shift in attitudes towards the environment and preserving our planet, and people like Greta Thunberg have played a significant part in this process. Any business that ignores these changes will ultimately fail. Investors are not fools, and they will demand that the companies and services into which they put their money are behaving in a way that is both profitable and sustainable over time.
This isn’t to say that more could not be done, and done quicker, and clearly continuing government action is a major factor in the speed of change. But to accuse business of being in denial about the environment is simply not correct.
We will give the last word to Garry;
“As more investors choose ESG benchmarks over traditional indices, the difference between being an ESG “winner” and “loser” could become much more meaningful. As demand wanes for shares in business that do not meet these criteria and increases for those that do, there is a real incentive for chief executives to act. Greta Thunberg is therefore wrong to say that bosses are paying lip service to this issue. She could argue that the pace of change isn’t fast enough, but change is definitely afoot.”
Garry White’s article can be found here.